Lehman Said to Be Looking for a Buyer as Pressure Builds

Only a day ago, the head of Lehman Brothers, the beleaguered investment bank, sought to assure Wall Street that the firm could survive on its own.

But those assurances seemed empty on Thursday as Lehman’ share price went into another free-fall, declining 41 percent, to $4.22.

As confidence in Lehman’s survival has faded, the chairman and chief executive, Richard S. Fuld Jr., has stepped up efforts to sell the 158-year-old bank, people briefed on the conversations said Thursday. Lehman, which had been negotiating to sell its prized investment management division, is now seeking to sell the entire company.

Among the potential suitors are Barclays of Britain and the Bank of America, these people said, as well as several private equity firms. In each case, the suitors are seeking help and assurances from the Federal Reserve to help make an acquisition palatable.

Barclays and Bank of America are seeking assurances that the Fed would guarantee a part of Lehman’s troubled assets, these people said, similar to the way it backstopped Bear Stearns’s portfolio during the sale to JPMorgan Chase.

While Mr. Fuld, who is also a director of the Federal Reserve of New York, has been in constant contact with regulators, it remained unclear whether the Fed will help, these people said.

The notion of a providing a guarantee as part of sale to a foreign buyer would be a tricky issue for the Fed. Without such assistance, potential suitors have suggested they would “walk,”s according to person briefed on the discussion. Fed officials have hinted that they would be more receptive to a bank buying Lehman, rather than a private equity firm.

At this point, Lehman hopes to buy enough time to reach the weekend so that it can complete a deal. But as its share price continues to decline, Lehman is coming under increased pressure to get a deal done. Spokesmen for the Federal Bank of New York and Lehman declined to comment.

While Lehman has few options, it has some advantages that Bear Stearns did not have before its collapse, mainly the special loan program subsequently created by the federal government for Wall Street banks. The risk for Lehman is that employees and money might quickly drain away if confidence in the bank continues to erode.

The decline in share price came as another big financial institution, the giant savings and loan Washington Mutual, also came under assault. Shares of Washington Mutual plunged by nearly 30 percent on Wednesday and another 21 percent on Thursday.

At Lehman on Wednesday, Mr. Fuld announced his plans in a conference call with analysts and investors. Inside Lehman’s Midtown headquarters, anxious employees huddled around trading screens to watch the reaction in the stock market.

Lehman said it expected to report a $3.9 billion loss for the third quarter, an even bigger deficit than analysts had forecast, and cut its dividend to shareholders. It also announced long-expected plans to sell most of its prized investment management division and, more radically, to split itself into a “good” bank and a “bad” one.

The split, a strategy employed with mixed success by several other banks in the 1980s and 1990s, would enable Lehman to isolate worrisome commercial mortgages and real estate.

Lehman planned to spin off about $30 billion of such problematical assets into a separate company — the “bad” bank — which would be owned by Lehman shareholders. The hope was that the holdings of the bad bank will eventually increase in value, yielding profits for its shareholders.

While shrinking the bank might improve Lehman’s short-term prospects, this strategy could pose long-term issues. To remain viable, analysts said Lehman might need to be part of a larger institution.

An error has occurred. Please try again later.

You are already subscribed to this email.

“In the current market you have to be either really huge or you have to be dominant in one business or in a good niche,” said Len Blum, a managing director at Westwood Capital, a financial advisory group. “They are not huge and they were dominant in fixed income, but that game is over in the near term.”

The measures announced Wednesday came as somewhat of a disappointment to Wall Street analysts and investors, because they were expected and because some of the moves could take months to complete.

“I don’t think the market will be patient for another quarter of losses and uncertainty and promises,” Mr. Blum said. “I think the market is looking for this to be the final fix.”

Other analysts give Lehman even less time, saying the bank needs to complete a sale within days to satisfy shareholders. Others are anxious for Lehman to secure financing from an outside investor.

Lehman stock plunged 45 percent Tuesday after its plans for a major investment from a Korean bank fell through, and is down more than 90 percent from the peak last February. The asset management sale, at least, is not likely to be completed that fast. Final bids are due this weekend but it will take several weeks to evaluate them, people close to the matter said. Finalists for the majority stake include the private equity groups Bain Capital, Hellman & Friedman and Kohlberg Kravis Roberts.

The spinoff of the real estate assets is not expected to be completed until early next year, and some analysts questioned whether the $5 billion to $7 billion in equity Lehman might use to support the new entity, to be called Real Estate Investments Global, would require the remaining “good bank” to raise even more money, something it has had trouble doing.

Lehman executives had insisted on Wednesday that the sale of the stake in the money management business would be enough to offset the capital going to support the “bad bank” and that no new money would be needed right away. However, Lehman and other banks have insisted throughout the credit crisis that they had ample capital only to rush out to raise even more.

Mr. Fuld said in his conference call that once the initiatives were complete, Lehman would emerge as a stronger, less-risky bank that should command a higher share price.

“This firm has a history of facing adversity and delivering. We have a long track record of pulling together when times are tough and then taking advantage of global opportunities,” he said. “We are on the right track to put the last two quarters behind us.”

Those two quarters have been horrific for a scrappy bank that until this year had never lost money since it emerged as a public company in 1994.

Lehman’s third quarter included another $5.6 billion in net write-downs on its residential and commercial real estate holdings as well as revenue declines in several of its businesses including investment banking and investment management.

The bank, however, reduced residential mortgage exposure by 31 percent, to $17.2 billion, and said it had agreed to sell $4 billion of its British residential mortgage portfolio to BlackRock, the asset management group.

Executives at Lehman also said the mere creation of the “bad bank” structure could help it sell other remaining assets. Potential bidders would know the firm now had the option of moving assets into the bad bank, where they do not have to be valued at current market prices, rather than selling at what they viewed as fire-sale levels.

Ben White contributed reporting.

A version of this article appears in print on , on Page A1 of the New York edition with the headline: Pressure Builds As Lehman Faces Mounting Losses. Order Reprints|Today's Paper|Subscribe